Hotel Management Contract Terms

Abstract

A study of 50 management contracts negotiated in 1997 and 1998 and covering 60 U.S. hotels found that the length of those contracts remains shorter than contracts negotiated in the 1970s and 1 980s. The mean term is just under 12 years, with one clump of contracts in the range of four to six years, and another clump at 20 to 24 years. Regarding early contract termination, the operator was entitled to penalty payments in two-thirds of the contracts in the event of sale, while a penalty applied in just one-third of the contracts in the event of foreclosure. All but one of the contracts provided for a base fee for the operator, typically 3 percent of some NOI figure; at high-volume hotels the average fee was 2.5 percent. While two offered no incentives at all, the remainder provided for incentives based on some performance measure. Nearly all contracts allowed the operator to charge for corporate or regional-office services-typically, a CRS fee or advertising expenses. The owner's right to approve budgets was almost universal, and three-quarters of the contracts gave the owner the right to review marketing plans. A big change from pre-1 990s' contracts is the demise of the operator's right of first refusal on sale of the hotel: only about one-fifth gave the operator the right to match any offer in the event of a sale.